News Analysis: Is Türkiye moving closer to interest rate cuts as disinflation continues?

by Burak Akinci

ANKARA, Oct. 3 (Xinhua) -- Türkiye's stringent monetary policies have improved the country's overall economic outlook and further subdued inflation in September, as discussions about interest rate cuts have intensified among analysts.

Annual inflation tumbled to 49.38 percent in September, down from 52 percent in August, official data revealed on Thursday. However, monthly inflation rose by nearly 3 percent, a higher-than-expected figure.

On September 5, the Turkish government revised its year-end inflation forecast for 2024 to 41.5 percent, up from 33 percent at the beginning of the year.

In Türkiye, inflation usually decreases during the summer months due to reduced energy consumption and increased tourism, which brings in foreign currency.

In the summer of 2023, Turkish President Recep Tayyip Erdogan initiated an economic overhaul after his country's annual inflation soared to a decades-long high of 85.5 percent in late 2022.

To tame runaway inflation, the central bank has gradually increased its benchmark interest rate from 8.5 percent to 50 percent.

The central bank has kept its policy rate steady for six consecutive months since March. However, exporters and industrialists urged policymakers to reduce rates to reverse the economic slowdown.

The central bank's next rate decision is scheduled for October 17, and observers believe that monetary policy will remain unchanged.

However, analysts expect an easing cycle to begin as early as November or December.

"For the central bank to consider an interest rate cut, the official inflation rate must decelerate to 45 percent," said independent economist Arda Tunca.

The data regarding interest rate cuts suggests that they may occur by the end of the year, with market expectations pointing to a possible cut in November, according to Tunca.

The analyst noted a general anticipation for the start of an easing cycle soon, emphasizing that fiscal policy must support monetary policy.

"I see that there is not enough support from there. This is a problem," Tunca said.

The analyst also mentioned that high interest rates make it difficult for companies to access loans. "It is time for interest rate cuts to prevent inflation from turning into a supply-side problem," Tunca added.

On September 5, the Turkish government revised its economic projections, raising consumer inflation forecasts for this year and the following years compared to previous estimates.

Türkiye's GDP growth expectations for 2024 have been revised to 3.5 percent, down from the 4 percent projected in last year's program. This indicates further deceleration in the economy, as data shows a growth rate of 4 percent in the first half of the year.

Atilla Yesilada, an Istanbul-based economist, believes inflation remains too high for policymakers to consider a rate cut this year.

"Price growth remains strong, as reflected in the September figures, and exceeds targets, while households' expectations about the economy are bleak," Yesilada, country advisor at the business management consultancy Global Source Partners, told Xinhua.

On the other hand, the government is confident that inflation will continue to decline.

Treasury and Finance Minister Mehmet Simsek, the architect of disinflation policies, said on his X account following the inflation data announcement that "the disinflation process that started in June continues."

"This period will be followed by a stabilization period in which we will achieve a permanent decrease in inflation and reach single digits," Simsek said.

Meanwhile, international banking institutions anticipate the first interest rate cut at the end of this year.

"We continue to see room for the central bank to cut in November or December, depending on the data," said ING Bank last week in a note to investors.

The bank added that the relatively stable Turkish currency and normalization in domestic demand should support a decline in the underlying inflation trend for the remainder of the year.

The Turkish lira has undergone multiple crashes in recent years, plummeting from 3.8 to the U.S. dollar in 2018 to 34.2 in October 2024.

This depreciation has significantly eroded the purchasing power of households in the import-reliant country.

Despite the government's efforts to reduce inflation, analysts believe it will likely take families several years to stabilize their finances.

In Ankara's Yildizevler neighborhood, Cagdas Yurt, the supervisor of a big residential building, said that while annual inflation has fallen steeply, it will take longer for people to experience financial improvement.

"Let's hope that 2025 will be better than this year," said Yurt.■